Managing supply-demand risk in global production: Creating cost-effective flexible networks

Globalization has led to the creation of hyper-efficient supply chains that work well in a predictable world. However, with globalization comes a world full of uncertainties, and these efficient supply chains often cannot cope with unpredictable fluctuations in demand and supply. These supply-demand imbalances are a major business risk in a vast array of industries-including aerospace and defense, auto-mobiles, chemicals, engineered products, pharmaceuticals, and semiconductors-because capacity is very expensive. Mix flexibility-whereby a plant can produce more than one kind of product-is an attractive antidote to this risk. In this article, we discuss better and worse ways to embrace mix flexibility. To begin, senior executives need to answer two key questions: How do we create flexible plants? And how do we go from flexible plants to a cost-effective flexible network? Successful companies will not blindly apply the same flexibility tactic throughout their business: they will tailor the Four Ps-product design, process design, production technology, and people-to fit the different characteristics of different tiers in their production chains. Successful companies will not sacrifice cost at the altar of flexibility: they will create cost-effective flexible networks by strategically configuring partially flexible networks in a way that delivers almost all the benefits of totally flexible networks. (C) 2014 Kelley School of Business, Indiana University. Published by Elsevier Inc. All rights reserved.